When asked whether Australia was at risk of a “subprime-style crisis”, Mr Medcraft said, “No, I don’t believe we are. But I think we need to learn the lessons from what happened in America and what ‘good’ looks like.

“From my point of view, when interest rates start rising we don’t see surges in defaults on home mortgages and that’s what responsible lending is all about and that’s what we want to enforce the law on. We don’t want to see that people have put themselves in over their heads and when rates rise, they can’t afford to pay their mortgage. That’s my greatest concern.

“We have seen a surge in interest-only loans, and we are troubled because perhaps people haven’t really taken account that they may never be able to repay the principal on the loan.”

According to Treasurer Scott Morrison, around 60 per cent of investor loans in residential property are interest-only, while “around a quarter” are for owner-occupiers.

When asked if surge in interest-only loans was being driven largely in investor borrowing, he said, “No, there has been a pick up in the percentage of owner-occupied interest-only loans as well and that troubles us somewhat because, clearly, if your repayment is low because you're only paying interest and you ignore the fact that you will eventually need to pay the principal, then that is a concern if you can’t afford it.”

Noting that lenders have reportedly improved their practices for inquiring about expenses when determining a consumer’s financial situation and capacity to make repayments since ASIC’s review into these loans in 2015, Mr Medcraft said that ASIC “will be going out to look again” at the way cost of living is calculated.

He said, “People need to look at their realistic cost of living and what they are going to have left to actually pay that mortgage, particularly if interest rates go up. It’s absolutely critical and particularly when [house] prices are high, but the issue is not so much that prices are high; the issue is that you don’t want to get caught in a situation where there is a market correction, and you have defaulted and your property is sold. That’s not what we want to see.”

New measures could address investor lending and household debt

Treasurer Scott Morrison welcomed the new focus on interest-only lending recently, stating that APRA’s additional supervisory measures to “address the buildup of risks associated with housing lending” demonstrated that “regulators are alive to risks around housing market lending and household balance sheets, and will continue to reinforce sound lending practices”.

He added, “Over recent weeks, I have noted increasing pressure on past measures to combat risks in housing lending. The growth rate of investor home loans had started to increase, with investor credit growth rising to 6.7 per cent through the year to February. I have also remarked upon the relatively high proportion of interest-only loans on housing lending, and I welcome APRA’s tightening of lending standards in that area. I have also noted the additional measures taken independently by ADIs to limit future investor credit growth.

“Australia’s independent financial regulators play an important role in helping to ensure Australia’s financial system is strong and stable and can withstand external shocks. These measures will help to provide stability to the housing market by reducing higher risk activity.”

However, Mr Morrison told Sky News on Monday that the crackdown on interest-only loans is “not just about the house prices”.

He said, “We’ve got household debt to GDP running about 125 per cent or thereabouts. In a time where interest rates are [where they are] now, what you want to be doing is paying down your principal; you want to be reducing the principal on your debt. Now, I think this is a very sensible measure in terms of dealing with a hotter demand around investor lending, but it’s also a sensible measure to try and address the issues around levels of household debt, which is an external liability in many respects and that does put pressure on how people view the stability of the Australian economy.

“Now, we know that that household debt is backed up by real prices, real values in the Australian real estate market, but nevertheless it’s never a bad thing, particularly when rates are low, to be paying down your debt.”